The Blanket of Barring Suits: Moratorium Under Section 14 of IBC
Abhinav Mishra
4th Year B.A. LL.B(Hons.) , Dr. B.R. Ambedkar National Law University
The Insolvency and Bankruptcy Code reconceptualised the framework of insolvency resolution in India, the said code contains a mechanism for the insolvency resolution of debtors with considerations borne towards time that allows maximisation of value of assets while promoting entrepreneurship and availability of credit and balancing the interest of all the stakeholders[1]. The code was enacted in 2016 after a series of recommendations to transform the insolvency framework, it was aimed to provide a consolidated framework of insolvency that would provide certitude of process, outcome to creditors, borrowers and other participants and all of the outcomes being bound by time.
The code focuses on mainly two objectives firstly on equal, expeditious and economic distribution of the assets of the debtor, and secondly liberation of liability of the person from the demands of the creditor[2].
The code separates commercial aspects of proceedings pertaining to insolvency and bankruptcy from of judicial proceedings, the said code facilitates the stakeholders and authorised authority to decide upon the matters expeditiously, the code envisages procedures that will help corporations from financial duress and facilitate closure of the same in accordance with the processes laid down under the code in accordance with rules and regulations of the act[3].
Introduction
The word “moratorium” has not been defined under the Insolvency and Bankruptcy Code, 2016, however, In Words and Phrases, Permanent Edition, Volume 27A, page 210, the word “moratorium” has been defined as a term designating suspension of all or of certain legal remedies against debtors, sometimes authorized by law during financial distress[4].
Cambridge Dictionary defines “moratorium” as the “stopping of an activity for an agreed amount of time”[5]. In the case of Shiv Kumar Tulsian & anr v. Union of India, the apex court observed that “moratorium implies postponement of obligations of the debtor to pay its creditor”[6].
Moratorium is initially mentioned under Section 13 (1) of the code wherein it is stated that the adjudicating authority after admission of application initiated under Section 7, 9 or 10 respectively shall by order declare moratorium for the purposes referred in the next section[7]. Further Section 14 talks about the power of adjudicating authority to declare a moratorium that shall prohibit all of the following: –
- “The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;”
- “Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;”
- “Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;”
- “The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.”[8]
The section also provides certain conditions and restraints such as the moratorium shall not apply to the supply of essential goods or services to the corporate debtor[9], under sub-section 3 the provision states that the moratorium shall not apply to transactions as may be notified by the Central Government after consultation with any financial regulator, and also shall not apply to a surety in a contract of guarantee to a corporate debtor[10].
Canvass of Moratorium
The moratorium is a way of providing a calm period that is aimed towards protecting and preserving the value of assets during the CIRP proceedings, in the case of Lanco Infratech Limited through its interim Resolution Professional v. Isolloyd Engineering Technologies Limited[11] it was stated that the section is in the wisdom of the intention of the legislature to provide for an opportunity to the financially distressed. The Bankruptcy Law Reforms Committee which was set up for drafting the Code mentioned in its report in paragraph 5.3.1 states that “The motivation behind the moratorium is that it is value maximising for the entity to continue operation even as viability is being assessed during the IRP. There should be no additional stress on the business after the public announcement of the IRP. The order for the moratorium during the IRP imposes a stay not just on debt recovery actions, but also any claims or expected claims from, old lawsuits or on new lawsuits, for any manner of recovery from the entity.”[12]
With reference to guarantors of the corporate debtor, the committee report has very clearly concluded in its findings, on the question of frivolous applications that may arise by virtue of section 10 of the moratorium and corroborate to the question of abuse of moratorium, “that to bar actions against assets of guarantors to the debts of the corporate debtor and provided for an explanation to be inserted in section 14”[13].
Though the provision has been given with respect to providing ease of insolvency proceedings, the provision also extends to breach of obligations arising out of a legally enforceable contract, arbitral claims, debt recovery, debt recovery by banking institutions under the SARFAESI Act, and even violation of fundamental rights, which essentially do not provide a remedy for action of non-payment of debt. Additionally, when read in consonance of Section 238 of the IBC and its overriding effect the scope of Moratorium provides a relatively easy method to being misused[14].
The Abuse
In the case of Shoblnath v. Prism Industrial Complex Ltd[15]., the adjudicating authority had referred to the fraud which the corporate debtor engaged on account of 1) the issuance of debentures by the corporate debtor in breach of the public issue norms, 2) some debentures were regarded to be “deposits”, regarding which the NCLT has passed orders for immediate repayment. It was alleged that the corporate debtor had raised deposits from retail investors, by instruments purporting to be debentures issued to more than 3000 investors. In light of this, the NCLT had held that admitting an application under Section 7, IB Code would mean that “the orders made by SEBI or NCLT for an immediate refund of the money, raised from retail investors will not be implemented during the moratorium period”[16] and the corporate debtors will be free of legal scrutiny of any form.
In BCL Homes Ltd. v. Canara Banks[17], the NCLT dismissed the application under Section 10, IB Code stating that the corporate debtor had sold huge chunk of land prior to filing of Insolvency proceedings and the only property that remained was mortgaged with the bank as security, the NCLAT however stated that no such details need to be looked into for admitting an application under Section 10 of the code and the NCLT should have admitted the application provided it was free from defects. Thereafter the moratorium was issued and stakeholders interest was compromised in the present situation.
In Gemini Innovations (P) Ltd. vs SBI,[18] the appellant filed the application under S10 on the basis of an arbitral award passed against the corporate debtor and it was alleged that the application was filed to circumvent the proceedings undertaken by it under the SARFAESI act and prevent the enforcement of assets mortgaged by the debtor with it. The NCLAT however, applying a strict interpretation of the provision held that NCLT had gone beyond the record and remitted the matter back for admission if the application under S10 filed by the appellant was complete. In the present case as well by virtue of stricter interpretation the corporate debtor was successful in enforcing a moratorium and misusing the law in place for his unfair advantage.
The above mentioned are only a few examples wherein the provision has been misused or purported to be misused owing to its stricter interpretation and had provided a pathway for corporate debtors to act in bad faith coupled with malafide intention.
Additionally, in the case of Power Grid Corporation of India Ltd Vs. Jyoti Structures Ltd.[19] High Court held that in consonance with the object of moratorium, Section 14 of the code shall not apply to the proceedings that are in the benefit of the corporate debtor, since the suit may be of value to the corporate debtor and shall add up to assets of the debtor and hence would not fall into the embargo of Section 14(1) of the code thereby creating a paradoxical situation.
Conclusion
The moratorium provision under section 14 of the Insolvency and Bankruptcy code serves as a crucial tool in the CIRP process by providing a calm period and temporary shield from disputes and initiation of suits and execution of prior suits against the corporate debtor. Albeit the provision has had constructive uses, several instances recently have highlighted the potential abuse of the provision to circumvent proceedings and compromise stakeholder interest through either strategic interpretation of the provision or intentional misconduct, The cause of the same can be attributed to the blanket barring of suits without any proper checking mechanism or authority.
With the rulings of Power Grid Corporation Of India Ltd Vs. Jyoti Structures Ltd. and similar rulings which provide for suits for the benefit of corporate debtors, but at the same time does not allow for an appeal of the same causing for raise eyebrows from principles of natural justice as well, in Garikapati Veeraya v N. Subbiah Choudhry & Ors[20] it was stated to be a trite law that “ in the legal pursuit of a remedy, the suit, appeal and second appeal are steps in a series of proceedings, are connected by an intrinsic unity, and are to be regarded as a composite legal proceeding” thereby an appeal from the same should also not be barred by the said provision[21].
Though moratorium was envisaged as a tool to fast-track resolution processes and preserve the interest of stakeholders and creditors, it’s one jacket fit all principle is not apt in its current state and shall require further judicial assessment as well as legislative assessment to constructively apply the provisions for actualising the interest of creditors and stakeholders and to align the goals originally mandated under the provisions and the IBC.
References:
[1] Neeti Shukla, New India Needs a Bold Insolvency Framework, The Sunday Guardian (Jan. 13, 2024) https://sundayguardianlive.com/news/new-india-needs-bold-insolvency-framework.
[2] Insolvency & Bankruptcy Board of India, Understanding The IBC: Key Jurisprudence and Practical Jurisprudence 18 (International Finance Corporation 2020).
[3] Ibid 1.
[4] Taxmann, Moratorium – Meaning and Objective in Insolvency & Bankruptcy Law Taxmann (Jan. 13, 2023) https://www.taxmann.com/post/blog/moratorium-meaning-and-objective-in-insolvency-bankruptcy-law.
[5] Moratorium, Cambridge Advanced Dictionary (4th ed. 2016).
[6]Shiv Kumar Tulsian & anr v. Union of India, [1990] 68 Com Cas 720(Bom).
[7] Insolvency and Bankruptcy Code, 2016, § 13, Acts of Parliament, 2016 (India).
[8] Insolvency and Bankruptcy Code 2016, § 14, Acts of Parliament, 2016 (India).
9 Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016, Regulation 32, Acts of Parliament, 2016 (India).
[10] Ibid 8.
[11]Lanco Infratech Limited through its interim Resolution Professional v. Isolloyd Engineering Technologies Limited, SCC OnLine NCLT 12502
[12] Bankruptcy Law Reforms Committee, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (Parliament of India), 2015, 5.3.1 (India).
[13] Insolvency Law Committee, The Report of The Insolvency Law Committee (Parliament of India), 2018, 34 (India).
[14] Srijan Jha, Selective Litigation: The True Purpose of L.B.C. Moratorium, 5.2 RFMLR (2018) 57.
[15] Shoblnath v. Prism Industrial Complex Ltd, [2019] ibclaw.in 20 NCLAT.
[16] Anant Kumar Mittal, Insolvency and Bankruptcy Code: Law and Practice 276 (Eastern Book Company 2020).
[17] BCL Homes Ltd. v. Canara Banks, (2018) ibclaw.in 228 NCLAT.
[18] Gemini Innovations (P) Ltd. vs SBI, 2018 SCC OnLine NCLAT 920.
[19] Power Grid Corporation of India Ltd Vs. Jyoti Structures Ltd., (2017) ibclaw.in 12 HC
[20] Garikapati Veeraya v N. Subbiah Choudhry & Ors, 1957 SCR 488
[21] Abhijnan Jha & Chetan Chawla, The Limits to A Moratorium: Interplay Between The Indian Insolvency And Bankruptcy Code And Defensive Proceedings, Mondaq (Jan. 17 2024) https://www.mondaq.com/india/insolvencybankruptcy/1278374/the-limits-to-a-moratorium-interplay-between-the-indian-insolvency-and-bankruptcy-code-and-defensive-proceedings.
